By Frank Curtin
Market analysts are continually being surprised by the performance of individual stocks in the marketplace. Along with economists, this must be the only job in the world where you can be wrong on a consistent basis and still remain employed. In this article, I look at five agriculture stocks that could surprise the market.
Mosaic Company (MOS): In ten to fifteen years the world population is forecasted to grow by another one billion people – equivalent to the whole population of China right now. With this growth has and will come an increase in demand for food products coupled with a reduction in arable farm land (see this article). Farmers will have to produce more from less land and this plays well for fertilizer companies like Mosaic Company. Not to mention the fact that the fertilizer industry has considerable barriers to entry and highly competitive economies of scale. It would take a new fertilizer company over seven years to build the mines and other infrastructure to enter the market, much less turn a profit. Mosaic Company has two main competitors Agrium (AGU) and Potash Corporation (POT) and I thought we would take a look at how they stack up. Mosaic Company has forecast earnings growth of 29.19% in 2012 and 8.6% in 2013 with a price-to-earnings ratio of 12.87 for 2011. Potash Corporation has forecast earnings growth of only 18.91% in 2012 and 0.41% in 2013 with a price-to-earnings ratio of 12.31 for 2011. Agrium has forecast earnings growth of only 0.86% in 2012 and - 5.30% in 2013 with a price-to-earnings ratio of only 8.37 in 2011. Mosaic Company is the better stock of the three in terms of current earnings and forecast earnings according to these metrics.
Potash Corporation of Saskatchewan (POT): Three of the most populated and ever growing countries in the world are Brazil, China, and India. Brazil has only 7% of arable farmland remaining, China has 15% and India has 49%, but a significant amount of the land gets washed out during monsoon season. This creates an ever increasing necessity to get the most out of the farm remaining and increases the demand for a fertilizer company like Potash Corporation. Potash Corporation is the world’s largest Potash producer along with the two other products the company supplies - phosphate and nitrogen, which are the main ingredients in fertilizer. Potash represents more than 71% of the company's total gross margin and is a relatively rare mineral that is mined in only twelve countries around the world. Canada, where Potash Corporation is based, contains over 50% of the world's known reserves giving the company a distinct competitive advantage. Prices of all three nutrients (potash, phosphate, and nitrogen) have risen in the last quarter, bringing the company's top line up to $2.3 billion - a 47% increase over the same period last year. Potash Corporation's revenue more than doubled in the same time period to $700 million (see this article).
Syngenta AG (SYT): Syngenta AG is a major research and manufacturing company in the agriculture sector supplying farmers with products that include insecticides, herbicides, fungicides and crop seed. We will be comparing the company with its two main competitors: DuPont (DD) and Monsanto Company (MON). Syngenta AG has a PEG ratio of 2.02 and forecast price-to-earnings growth of 21.48% in 2011 and 9.59% in 2012, DuPont has a PEG ratio of 1.35 and forecast price-to-earnings growth of 22.70% in 2011 and only 7.93% in 2012. Monsanto Company has a PEG ratio of 1.85 and forecast price-to-earnings growth of only 15.79% in 2011 and 16.48% in 2012. This indicates that Syngenta AG is slightly more expensive (relatively) at its current price but the company's 2011 forecast price-to-earnings growth of 21.48% may justify this price and there is always momentum to consider. Syngenta beat sales expectations in the company's most recent earnings report (see this article) and its share price advanced 3.9% on the news. Latin American sales in particular soared 21% in the third quarter. There are only three analysts presently covering the stock, so it hasn't attracted much attention yet. Two of the analysts have a strong buy and one has a hold. This would be a good stock to buy in gradually as conditions improve in Europe but constant monitoring of the stock and developments would be prudent.
Monsanto Company (MON): Although the patent for Round Up Weed and Grass Killer has expired (Monsanto's top consumer product), the brand still carries a significant amount of value and price premium to support the company's gross margins. Another factor to consider when analyzing this company is ethanol and specifically corn and soy. As the world economy resumes its expansion, the price of oil and gas will resume its price rise bringing with it a renewed demand for biofuels. Together with the reduction in arable farm land, increase in population and food demand, Monsanto Company pretty much has all the bases covered. The Frankenfruit debate (see this article on genetically modified plants) won't have much impact on corn and soy grown for biofuels and may even go a long way in cleaning up Monsanto's image if it can package the public relations correctly. Monsanto Company currently has a PEG ratio of 1.85 indicating it is somewhat expensive but with the company's forecast earnings growth of 15.79% in 2012, 16.48% in 2013, 21.49% in 2014 and 27.84% in 2015 it might not be as expensive as it looks on the surface. All that being said you may want to keep an eye on this development with DuPont (DD) going forward.
Deere & Company (DE): Nothing runs like a deer and if the world economy gets back on track in the near future the same could be said about Deere & Company. Deere has set itself up adequately to benefit from renewed growth in emerging markets in agriculture and to a lesser extent in construction equipment. The company has been establishing a marketing and distribution presence in western Europe and Russia where it faces traditional competition from CNH Global N.V. (CNH). Deere & Company has also built factories in Brazil and China and a technical and engineering center in India. See this News Release about Deere & Company's plans in Brazil. Deere & Company has several worldwide competitors in the industry but we will focus our comparison on two of the main companies - CNH Global and Caterpillar Incorporated (CAT). Deere & Company has a PEG ratio of 0.84 and forecast earnings growth of 38.46% in 2011, and 11.97% in 2012. CNH Global has a PEG ratio of 0.72 and forecast earnings growth of 75.82% in 2011, and 11.56% in 2012, while Caterpillar Incorporated has a PEG ratio of 0.65 and forecast earnings growth of 63.43% in 2011, and 32.11% in 2012 - indicating Caterpillar is the cheaper of the trio in terms of growth but this does not take into account a turnaround (analyst scratches his head) in the agriculture sector where Deere & Company has a competitive advantage in the form of branding and future emerging market prospects.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.